M&T Bank Corp. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; balance-sheet comparisons are with December 31, 2009 unless otherwise stated. The filing was signed May 6, 2010.
Business context and results
M&T is a bank holding company whose businesses include commercial, retail, business, real estate and mortgage banking. Comparability with Q1 2009 is affected by the May 2009 Provident acquisition and August 2009 Bradford Bank transaction; their operations were included in results after acquisition.
- GAAP net income was $151.0 million, versus $64.2 million in Q1 2009. Diluted EPS was $1.15, versus $0.49; net income available to common equity was $138.3 million.
- Return on average assets was 0.89% (0.40% in Q1 2009); return on average common equity was 7.86% (3.61%). Management’s non-GAAP “net operating income” was $161.0 million and diluted operating EPS was $1.23; these measures exclude specified acquisition-related items and intangible amortization.
- GAAP net interest income was $556.3 million and provision for credit losses was $105.0 million. Taxable-equivalent net interest income was $562.3 million, up 24% year over year; net interest margin was 3.78%, versus 3.19% in Q1 2009 and 3.71% in Q4 2009.
- Total other income was $257.7 million, compared with $232.3 million. Other expense was $489.4 million, up from $438.3 million, reflecting acquired operations, higher FDIC assessments and seasonal compensation costs. The reported efficiency ratio was 55.9% on management’s adjusted definition; including intangible amortization, it was 57.8%.
Financial position, liquidity and capital
- Total assets were $68.44 billion; loans and leases, net, were $50.55 billion; investment securities were $8.10 billion.
- Deposits totaled $47.54 billion. Federal funds purchased and repurchase agreements plus other short-term borrowings totaled about $1.87 billion; long-term borrowings were $10.07 billion.
- Stockholders’ equity was $7.92 billion, or 11.57% of assets. Tangible common equity to tangible assets was 5.43%. Consolidated regulatory capital ratios were 8.88% Tier 1 capital, 12.62% total capital and 8.59% Tier 1 leverage.
- Cash and cash equivalents ended the quarter at $1.04 billion, down from $1.25 billion at the start. Operating cash flow was $653.6 million; investing cash flow was negative $47.7 million and financing cash flow was negative $808.6 million.
- Common dividends remained $0.70 per share. No shares were purchased under the company’s announced repurchase program during the quarter.
Material changes and credit quality
- Net charge-offs were $94.5 million, down from $99.9 million in Q1 2009 and $134.9 million in Q4 2009; annualized net charge-offs were 0.74% of average loans, versus 0.83% and 1.03%.
- Despite lower charge-offs, nonaccrual loans rose to $1.34 billion, or 2.60% of loans, from $1.00 billion, or 2.05%, a year earlier. Nonperforming assets were $1.44 billion, versus $1.10 billion. Commercial real estate and commercial loan deterioration contributed to the year-over-year increase.
- The allowance for credit losses was $891.3 million, or 1.73% of loans, versus $846.0 million, also 1.73%, a year earlier. Management said it considered the allowance adequate, while noting economic and valuation uncertainty.
- Core deposits averaged $42.9 billion, up 24% year over year, partly reflecting acquisitions and a shift toward savings and noninterest-bearing deposits. Average loans were $51.9 billion, up 6% year over year, but excluding newly consolidated securitization loans, average balances declined 1% from Q4 2009.
- Effective January 1, 2010, new consolidation rules brought two non-recourse mortgage securitization trusts onto the balance sheet: loans increased $424 million, available-for-sale securities decreased $360 million at amortized cost, and borrowings increased $65 million. The quarter-end carrying value of trust loans was $406 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available liquidity was adequate for anticipated normal-course funding needs. It also warned that actual outcomes can differ materially from forward-looking statements.
- Management identified continued economic weakness, unemployment, housing-market stress and depressed property values as risks to borrowers and collateral. Particular credit exposures include residential builders and developers, Alt-A mortgages, commercial real estate and certain regional commercial borrowers.
- The company recorded $26.8 million of net other-than-temporary impairment losses in earnings on available-for-sale securities (about $27 million pre-tax), primarily privately issued residential mortgage-backed securities. The after-tax impact was approximately $16 million, or $0.14 per diluted share. Valuations for much of this privately issued portfolio rely on Level 3 estimates and assumptions about defaults, loss severity, prepayments and market liquidity.
- Mortgage banking revenue fell to $41.5 million from $56.2 million in Q1 2009, largely due to lower residential mortgage origination activity. The company also cited increased investor reimbursement requests on previously sold loans, though it considered the related remaining liability immaterial.
- Off-balance-sheet commitments included $17.2 billion to extend credit, $3.8 billion of standby letters of credit and $1.7 billion of financial guarantees and indemnification contracts. Many may expire without funding. Pending litigation was not expected to be material to financial position, though future-period effects could not be determined.
- AIB, which held 22.5% of M&T common stock, announced plans to sell its stake by the end of 2010 to meet Irish capital requirements. The filing also describes TARP-related preferred stock terms and restrictions, including limits on common dividends above $0.70 per share.
Key facts for investors to verify
- Whether nonaccrual loans and nonperforming assets continue to rise, especially in commercial real estate and builder/developer portfolios, and whether the allowance remains adequate.
- Assumptions and sensitivity behind Level 3 mortgage-security valuations and any subsequent impairment charges.
- Whether net interest margin and deposit costs remain favorable as interest rates, funding mix and loan demand change.
- Capital and liquidity implications of AIB’s announced share sale, TARP preferred-stock conditions and substantial off-balance-sheet commitments.
- Potential effects of mortgage-loan repurchase claims, pending litigation and regulatory changes to consumer deposit fees.